In The News › Fiscal crisis eases a little in N.O.

Mar 25, 2006

Source: Times-Picayune

Fiscal crisis eases a little in N.O.

Fiscal crisis eases a little in N.O.
Revenue runs ahead of Nagin’s forecast
Saturday, March 25, 2006
By Bruce Eggler
Staff writer

New Orleans’ financial situation remains dire, but its economy is doing better than expected and city government won’t run out of money for at least another two months, and well beyond that if it is able to obtain more federal money or more loans from private sources, according to city officials and consultants.

In testimony this week to the City Council’s Budget Committee, top financial officials in Mayor Ray Nagin’s administration said the good news is that the city ended 2005 with a sizable amount of money on hand and that this year’s sales tax collections and some other revenue sources are running well ahead of the levels Nagin forecast last year in submitting a 2006 city budget. That budget contained a deficit of more than $200 million, based on known revenue sources.

In addition, the city’s consultants said, although New Orleans’ credit rating was downgraded to “below investment grade” after Hurricane Katrina, it could be upgraded again by this fall. They also said potential lenders seem amenable to the idea of giving the city further loans, although nothing has been worked out.

But there’s plenty of bad news too. The officials said the city still faces a deficit of between $100 million and $150 million this year and it could be out of cash to pay its workers and other bills by May, meaning it would have to lay off police and firefighters and take other drastic measures. The city also is looking at a further $140 million deficit in 2007, they said.

To deal with the problems, Assistant Chief Administrative Officer Cary Grant said, the administration is “engaged in soliciting private financial institution loans and state/federal government loans and grants. We are aggressively seeking amendments to the Stafford Act and reallocation of CDBG funds, and requesting financial assistance from the state.”

The Stafford Act spells out the rules for federal assistance to disaster areas, including what percentages of each type of aid the state or local government must cover.

The state has billions of dollars in Community Development Block Grant money that, with federal approval, it can allocate to local governments, schools, utilities, homeowners and others struggling to repair storm-damaged infrastructure.

Peter Kessenich, an Atlanta financial consultant who has worked with the city for many years, said the city has been talking with two groups of potential lenders about borrowing as much as $150 million. The city already has spent the $50 million line of credit it got in the fall from Chase Bank.

Kessenich said he hopes to have a deal with the new lenders, whom he did not name, concluded in four to six weeks. The very fact the banks are willing to talk, he said, shows they see reason for optimism about the city’s future.

Meredith Hathorn of Foley & Judell, the city’s bond attorneys, said it may be possible to restructure the city’s debt this summer to defer payments and give the city some short-term relief.

Reductions feared

But unless major new revenue is obtained from loans or grants, Grant warned, the city will have to “drastically reduce” its budget by laying off police officers, firefighters and emergency medical service personnel, who were exempted from a 50 percent cut in the city’s workforce last fall, and by reducing or eliminating employee benefits.

It also might have to reduce the money it gives to local courts and parochial offices, such as the district attorney’s and criminal sheriff’s offices, already cut by 30 percent, to what Grant called “minimal” levels.

Councilman Jay Batt was not present for Thursday’s presentation, but he told the administration at a council meeting last week that trying to “borrow our way out of (the current crisis) is a bad idea” because the loans will all have to repaid, probably by raising property taxes. “What I’m hearing doesn’t sound like a real game plan,” said Batt, the council’s only Republican member.

He said the city instead should pressure Gov. Kathleen Blanco to let the city have more of the state’s Community Development Block Grant money.

“Talk of more borrowing scares the you-know-what out of me,” Batt said. “It doesn’t appear to me we have a plan.”

One option not mentioned by anyone during either discussion was bankruptcy. The Bureau of Governmental Research reportedly is working on a report exploring that possibility.

This week’s presentation was the first time administration officials have publicly discussed the city’s financial picture in depth since Nagin presented his 2006 budget in late October.

At that time, Nagin said he was “pretty confident” the hurricane-ravaged city could borrow enough money to make it through the rest of 2005 and the first quarter of 2006. Beyond that, he said, “the picture gets a little blurry,” with no one having any real idea how much revenue the city could expect to raise from taxes or other sources.

Nonetheless, he presented the council a 2006 operating budget of $459.9 million. The general fund, the part of the budget the city has direct control over and must finance itself, would total $317.4 million, a reduction of $155.3 million, or 33 percent, from the original 2005 budget. Besides the general fund, the total budget includes federal and state grants dedicated to specified programs.

Despite the 33 percent reduction in the general fund, achieved by continuing the layoffs of 2,400 city workers announced shortly after Hurricane Katrina and cutting most departments’ other expenses by 30 percent to 50 percent, Nagin said last fall, there was still a massive hole in the 2006 budget.

Assuming the city in 2006 would get 20 percent of the tourists it expected before Katrina and what he called a “realistic” amount of property taxes, Nagin said general fund revenue would amount to only $112.5 million, leaving a gap of $204.8 million.

Ahead of forecasts

Based on results for early 2006, Grant told the council committee this week, it now looks like general fund revenue will total about $186 million, or $73.5 million more than Nagin forecast in October. In addition, the city had $36 million remaining from the $120 million federal Community Disaster Loan it received in 2005. It spent all that money in January and February.

Overall, general fund revenue in 2006 is now forecast to total $222 million, or $102 million less than budgeted spending of $324 million.

In addition, the city could be facing $45 million in additional expenditures that would bring the budget gap to nearly $147 million. Those costs include unemployment benefits for the 2,400 laid-off city workers, health care benefits for workers, and a bill from the state for the cost of housing thousands of Orleans Parish Prison inmates held outside the city since Katrina.

Property tax revenue is now expected to reach $38 million, almost $10 million more than Nagin forecast in October but $40 million less than the city received in 2005. The 2005 figure was scarcely affected by Katrina because payments were due well before the storm struck.

Sales tax revenue is forecast to total $69 million, far above the $21 million originally figured for this year but far below the $116 million the city got in 2005, when the last five months were affected by Katrina, and even further below the $150 million it received in 2004.

One of the largest drops from pre-Katrina days is in the sanitation service fee that residents pay through their monthly water bills to cover the cost of garbage collection. That fee is expected to bring in $4.7 million this year, compared with more than $24 million in 2004.

Parking meters are expected to yield $500,000, down from $3.4 million in 2004. Parking meter fines are expected to bring in $1.3 million, down from $11.2 million in 2004.

“Other miscellaneous revenues,” a catch-all category that yielded $57 million in 2004, is forecast at just $8 million in 2006.

Thanks to use of the Community Disaster Loan money and strong sales tax proceeds, the city’s cash flow position is better than expected a few months ago, Grant said, meaning it should stay solvent until May, two months before it expects to get a $19 million infusion of property tax revenue after 2006 tax bills finally are sent out.

Jerome Lomba, the city’s chief economist, said he has been “very pleasantly surprised” by the strength of the city’s recovery. Instead of 18 percent of the city’s pre-Katrina businesses doing 20 percent of pre-Katrina sales, as anticipated, he said, 48 percent of pre-Katrina businesses are doing 50 percent of pre-Katrina sales.

In addition, Lomba said, the drop in assessed valuations of property was less than feared, and there is “substantial upside potential” in some other revenue categories.

Finance Director Reggie Zeno said that thanks to $84 million in Community Disaster Loan money and better-than-expected tax collections, the city ended 2005 with a fund balance of $27 million, according to preliminary figures.

Looking ahead to 2007, Grant said, the city faces the prospect of a $140 million deficit. To deal with that, he said, the administration intends to hire a consultant to advise it on “downsizing its operations” and to seek relief on the state level through the use of tax credit bonds available under “GO Zone” legislation recently adopted by Congress. The Gulf Opportunity Zone Act gives Louisiana businesses and local governments access to billions of dollars in loans.

. . . . . . .

Bruce Eggler can be reached at or (504) 826-3320.

Mar 25, 2006

Source: Times-Picayune

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